EU RENEWS PRESSURE OVER U.S. AIRLINE OWNERSHIP

By Diane M. Grassi


The United States Senate Committee on Commerce, Science and Transportation and its Aviation Sub-Committee held a hearing on May 9, 2006 similar to that of the February 8, 2006 hearing before the U.S. House of Representatives Aviation Sub-Committee. Both were in regard to the proposed Open Skies Agreement between the European Union and the U.S. This latest hearing comes on the heels of newly proposed language from the U.S. Department of Transportation (DOT) concerning the foreign ownership of and investment in U.S. airlines.

What remains at issue is how much “actual control” a foreign airline could presume to have over a U.S. airline as part of the Open Skies Agreement, which the Bush administration had hoped to be ready for finalization by the end of 2006. But that now seems to be unrealistic. There will meetings held in Europe in June 2006 and John Byerly, a senior State Department official, and the head negotiator in the Open Skies talks, will be presenting the recent proposed changes in Brussels the week of May 8th. On May 11, 2006 the Senate in fact will include when voting on its budget bill, whether or not to delay on making a decision on the Open Skies Agreement, until further review.

In question, in both the House and the Senate, has been expressed concern that allowing deregulation of airline traffic internationally must be a decision that the Congress alone decides and that the DOT does not have the unilateral power to revise transportation law which would include parts of the Civil Aeronautics Act of 1938, followed by the Federal Aviation Act of 1958, which created the Federal Aviation Administration, and later on the Airline Deregulation Act of 1978. After the 9/11 attacks of 2001, the Aviation and Transportation Act of 2001 was enacted, creating the Transportation Security Administration, now under the Department of Homeland Security.

As per the 1938 law, U.S. citizens must own or control at least 75% of the voting interest of U.S. airlines. In 1991, DOT proposed increasing foreign ownership interest to 49%, but it was not adopted by the Congress. In 2003, however, the Congress modified the phrase, “which is under the actual control of U.S. Citizens” in the Federal Aviation Act under 49 USC 40102(a)(15) to now read: “a corporation or association organized under the laws of the U.S. or a State, the District of Columbia or a territory or possession of the U.S., of which the president and at least two-thirds of the Board of Directors and other managing officers are citizens of the U.S., which is under the actual control of citizens of the U.S., and in which at least 75% percent of the voting interest is owned or controlled by persons that are citizens of the U.S.”

There appears to be plenty of legal precedent already on the books regarding airline ownership and the oversight requirements of the U.S. Congress. But the latest revision in the DOT’s proposal by Secretary of Transportation, Norman Mineta, is an attempt to appease the EU and some lawmakers which looks like more redundancy. Regardless, the EU is not budging on its insistence that the U.S. must increase the percentage of foreign ownership of U.S. airlines, and threatening that without such will kill the deal.

Initially, trade negotiations with the EU to loosen up regulations in ownership of U.S. airlines was seen as a tradeoff by the DOT in order for the U.S. to gain greater access to landing at London’s Heathrow Airport, for example, and to increase commerce between the 25 EU countries and the U.S. But long before the now infamous 2006 Dubai Ports World deal, lawmakers in both parties felt that this proposition transcended ‘free trade’ or globalization due to its direct impact on U.S. labor and national security. And the Committee on Foreign Investments in the U.S. (CFIUS) technically did have the law behind it in issuing its approval of the Dubai deal.

But Secretary Mineta, in a statement in November 2005, said that the rule change would be an “historic opportunity to increase travel, reduce fares, expand commerce and bring two continents closer together than ever before. It provides new opportunities for U.S. and European airlines, healthier competition for a growing travel market and greater connection between cities and towns of all sizes on both sides of the Atlantic.”

The supplemental proposal announced on May 3, 2006 makes clear that U.S. citizens as members of a U.S. airline’s Board of Directors or as the voting shareholders “must retain the authority to revoke decision-making authority that international investors may acquire.” For example, board members might decide to revoke international investors’ decision-making authority over scheduling and fleet composition if they felt that those decisions were not in their airlines’ best interests.

And the revised proposal would supposedly give the U.S. full control over policies such as safety, security and national defense commitments, in the event of a national emergency. However, instead of the U.S. and the FAA dictating jurisdiction over key strategic U.S. assets, that being U.S. airlines, it would appear that such oversight by the Department of Defense and the Department of Homeland Security would be relegated to that of a Chairman of the Board.

According to Jeffery Smisek, President of Continental Airlines, Inc., who has been outspoken and against the Open Skies Agreement as now proposed, stated in the February 8th hearing that “the right to control U.S. airlines would be given away for rights of little to no value for U.S. combination airlines and the customers they serve. London’s Heathrow, Europe’s largest and most significant airport for U.S.-Europe travel, is closed to entry and would remain effectively closed to additional U.S. airlines, even if the multilateral Open Skies Agreement were signed. This is because absent the provision of competitive, economically viable slots and facilities at Heathrow for U.S. airlines, the greatest single impediment to free and fair U.S.-Europe competition will remain in place.” And the Government Accountability Office in its recent report agrees that airport capacity limitations at Heaththrow would not be corrected by such a deregulation agreement.

Should the new rule be adopted, with exception of few areas, all airline operations, including prices, scheduling markets, fleet structure, marketing and alliances have the option of being controlled by foreign investors. Additionally, U.S. labor law protections would be endangered and employees could be replaced by foreign employees. Aviation safety could be jeopardized as foreign-controlled management need only meet minimum FAA standards and on a voluntary basis, falling far short of the programs and practices presently in place in the U.S.

Surprisingly, the Department of Defense as well as the State Department have both agreed with the DOT. But for several Congressmen, it does not pass muster and especially as it concerns the Civilian Reserve Air Fleet (CRAF) which is used to transport U.S. troops and officials in times of national emergencies when there are not enough military aircraft to move personnel.

And although the agreement would provide for the U.S. retaining oversight of the CRAF, if the economic control of a U.S. carrier is controlled by an offshore airline, the foreign airlines’ business strategy or country’s allegiance could be in direct conflict with the national security needs of the U.S. According to Congressman Peter DeFazio (D-OR), “During the Gulf War a European Union member didn’t supply us with a type of carrier we needed when we ran out because they didn’t support the war.” Given the present anti-American sentiment worldwide, it leaves the U.S. vulnerable.

Captain Duane Woerth, President of the Airlines Pilots Association, Intl., appearing in the February 8th hearing pointed out that “When two or more U.S. carriers are commonly controlled, employees of all of them are subject to the Railway Labor Act and therefore have the same collective bargaining rights and opportunities. This allows the employees on all the affiliated carriers to try to equalize their wages and working conditions. When one of the affiliated carriers is foreign and therefore not subject to the same labor law, employees of all the affiliates are placed at a severe disadvantage, facing the prospect of being bid against each other without effective recourse against the foreign entity allocating work.”

The EU, however, has not concerned itself which such issues. The Council of EU Member States, comprised of 25 European countries, has stated that “improvements in the field of ownership and control of U.S. airlines would be an essential element for the deal to be completed.” This would require amending the law stating that the U.S. must maintain 75% ownership of its airlines. Other criteria they have demanded is the right to fly between every city in the EU and every city in the U.S. Presently the U.S. and the EU may take off from one destination and land at one destination only. The EU insists in operating without restriction on the number of flights, the aircraft used, or the routes chosen, including unlimited rights to fly beyond the EU and the U.S. to points in third countries. They would have the agreed upon control to set fares freely in accordance with market demand and to enter into co-operative agreements with other airlines, including leasing.

But still very much unanswered by the U.S. government are legitimate questions of concern and the mechanisms which will ensure the continued safety and security of the U.S. and Americans. How will decisions be made pertaining to deal with Department of Defense issues? How will the U.S. retain a position in order to control decisions and activities relating to aviation security, now controlled by the TSA? What controls and policies will be maintained to ensure carrier policies, safety inspections and maintenance?
And how many more jobs must be lost and concessions be made by airline personnel in the interest of free trade?

It would seem that instead of thorough disclosure before the Congress, policy makers rather than elected officials and the respective agencies presently presiding over U.S. airline carriers, have not been invited to the party. Instead, the words protectionism and sovereignty are echoed and stigmatized, in order to intimidate the Congress, the U.S. airlines, labor and American citizens.

And as much as it is repeated that the “world has changed since 9/11,” proceeding more cautiously, given the obvious security and energy issues at stake, would make sense. Instead, mere appointees of the U.S. government are given unlimited power to wheel and deal with those in ivory towers. And once again the best interests of the American people are but a blip on the radar screen.